Definition
The acronym KYC is short for Know Your Customer, and refers to the regulatory obligation for financial institutions to identify their clients before allowing them to use their platform.
Does Crypto Need KYC?
The recent introduction of KYC has become one of the biggest regulatory obligations crypto exchanges have had to implement in recent years. It is believed that enforcing KYC compliance would help in tackling malicious or illegal activities within the crypto space.
However, given the decentralized nature of cryptocurrencies which are designed to allow customers to remain anonymous and keep their personal information private (especially from any central authority), this has become a conflict with regulatory authorities.
While all centralized exchanges now do require KYC, many decentralized exchanges are still able to offer their customers anonymity.
Why does Crypto Have "Know Your Customer"?
KYC, or "Know Your Customer," is a process that financial institutions and companies involved in financial transactions use to verify the identity of their clients. The primary aim of KYC is to prevent money laundering, fraud, and other illegal activities. It involves collecting and verifying information such as the customer's name, date of birth, address, and identification numbers. In some cases, it may also include understanding the nature of the customer's activities to assess the risk of illegal intentions.
Here are the typical steps involved in a KYC process:
- Customer Identification: The customer provides basic identification information, such as name, address, and date of birth.
- Document Verification: The customer submits documents to prove their identity. This could include a passport, driver's license, or utility bills for address verification.
- Risk Assessment: The institution may assess the risk level of the customer based on their financial activities, source of funds, and other factors.
- Ongoing Monitoring: Even after the initial KYC process is complete, companies continue to monitor customer transactions to identify suspicious activities.
KYC is especially crucial in the financial and cryptocurrency sectors to comply with Anti-Money Laundering (AML) laws and Combat the Financing of Terrorism (CFT) regulations. Failure to comply with KYC guidelines can result in hefty fines and legal consequences for the institutions involved.
What Crypto Exchanges Don't Have KYC?
Most of the major and well-known Centralized exchanges (CEX) already have KYC in place. However, there still exists some smaller exchanges that don't require KYC.
However, there is an entire group of exchanges that don't require KYC and many of those are Decentralized Exchanges (DEX).